Real estate investors have options when it comes to purchasing their next investment deal. They can pay with cash, team up with a partner, or leverage the property. No matter what they choose, it’s always best to do some research and come up with the best strategy that works for that particular deal. If an investor chooses to get a loan for their project, one of the more important aspects to consider is the costs and fees that will be associated with the loan. Every lender will have their list of charges that will likely differ from their competitors. Below is a list of potential costs that may or may not be incurred during the loan process or at closing.
Application and processing fee
Once a lender receives a client’s application, they need to spend manual effort to vet the potential deal. An application fee will cover the cost of reviewing the application to decide if the deal has potential. The lender may also charge a processing fee to pay for the additional time needed to analyze the deal scenario and calculate initial terms for the client to consider. Some lenders charge both application and processing fees, while others charge only one or none at all. Keep an eye out for these fees and make sure to ask if they can be waived if the loan gets approved.
The cost of a property appraisal is typically paid by the borrower out-of-pocket. The appraisal fee pays for the cost of a professional appraiser to estimate the market value of the home. If the borrower is purchasing the home as a fix and flip project, the appraiser will also estimate the after-repair value (ARV) to determine what the property would be worth after the renovations are complete. The total appraisal cost will vary depending on the size and location of the property. For example, larger and more unique properties will be more expensive than smaller, single-family houses. Also, keep in mind that the appraisal fee may be slightly higher if a client requests a rush or needs the appraisal fast to close the deal sooner.
A survey may be required if there is no current survey of the property available. A licensed surveyor will create a drawing or map showing the property boundaries and access points. The survey will contain a property description, any improvements, and areas where new improvements can be made. It will provide the new owner with details on exactly what they are purchasing and detailed measurements of the land.
Larger, more expensive fix and flips will most likely be asked to order a feasibility study. This report will ensure that the expected property renovations are reasonable, have an appropriate time frame and will be completed within the limits of the estimated budget. Property expansions, structural and foundational changes are some examples of work that will likely require a feasibility study. Lenders will ask for this report to confirm that the client is making realistic decisions during the rehab process and will be able to pay off the loan at the end of the loan term without serious complications.
Credit check fee
Credit checks are an important milestone in the loan process. A credit report may be either a hard or soft pull. Soft pulls are less expensive and do not affect a person’s credit, but most lenders will require a hard pull because the will want a comprehensive overview of a person’s credit history. Unlike a soft pull, a hard pull will show up on a credit report and may slightly lower a credit score. Multiple hard pull credit checks will have a larger impact on credit.
Background report fee
Another important report that a lender will typically require is a background check. This report will display a person’s criminal records, employment, and education history. Some of the information may not be relevant but potential issues may push a lender to discuss it with their client and request a letter of explanation to get their side of the story. A lender may also run a background check to verify a client’s real estate experience. Proven real estate investment experience may improve pricing and will increase a lender’s comfort level in offering more favorable terms on a potential deal.
Legal fees are typically one of the closing costs in a real estate deal and may either be a flat fee or an hourly rate. A lender’s legal team may cover a variety of different services like preparing legal documents, reviewing documentation, and sending out the appropriate paperwork. A closing attorney will also be involved in examining the title and provide an opinion for the title insurance company. They will communicate between all parties involved to make sure issues are being resolved, they will be the attorney in charge of closing the transaction and dispensing payments to anyone that needs to be paid.
Purchasing insurance for a property like homeowners, floor and title insurance will be required during the loan process. Homeowners’ or builder’s risk insurance will cover the cost of any damages that may occur during renovations on the property. Flood insurance will be needed if a property is designated to be in a flood zone and title insurance will protect the lender in the event that problems occur with the title. Finally, future landlords may be asked to obtain loss of income insurance to protect against rent loss if a rental unit remains vacant.
An important cost typically associated with borrowing from a lender is the origination fee. Also known as points, this is a fee that the lender charges for the creation and servicing of the loan. Each point is 1% of the loan amount and is due at closing. Origination fees may differ depending on the lender, the size of the deal and the location of the property. Larger loans can have smaller origination fees because the loan amount is high enough for the lender to make their money while charging fewer points. On the other hand, smaller loans can have increased origination fees because the cost of lending is higher compared to the profit the lender is able to make on the loan. They are still spending the same time and manpower to close the loan for a much smaller return.
While this list is by no means exhaustive, it aims to provide investors with enough information to understand the types of fees their future lender may charge. Leveraging a property can be a great option. It can give an investor the power to purchase multiple properties and grow their real estate portfolio faster. It can increase the return on investment, generate tax deductions from the interest payments, and build wealth by creating a forced savings plan. If done right, the costs and fees associated with getting a loan will more than pay for the profit the investor makes on a great deal. At RCN Capital, we provide bridge financing, fix and flip loans, and both short- and long-term rental loans. We do not charge application or processing fees so applying for one of our funding options is quick and easy. Apply today and get started on growing your investment portfolio.